A Random Stroll Up to Wall Street

At the recommendation of my friend Bobby, I have started to read “A Random Walk Down Wall Street”.  This book is known as one of the premier investment books and a modern day classic.  I am slowly working my way through it, and I am sure you will hear me reference this book a lot as I read it.  However, today I wanted to share a simple tidbit from the first chapter.

The author, Burton Malkiel, references two different theories with regard to investing based on what the prospects of the future hold.  He calls these two theories, “The Firm Foundation Theory” and the “Castle-in-the-air Theory”.

The Firm Foundation Theory assumes that there is an intrinsic value for all stocks.  Something is either undervalued, overvalued, or at the right price.  Discovering what is undervalued or overvalued, and playing the market in the right direction until the stock reaches equilibrium is the way this theory works.  This also epitomizes the ‘buy and hold’ strategy of investing.  For example, lets assume Microsoft’s stock has been in the tank for some reason the past handful of months.  You know they will bounce back eventually; it’s only a matter of time.  So you buy the stock when it’s low, and hold onto it.  Eventually it will come back to its equilibrium value, and you made yourself a nice profit.  Warren Buffett is the perfect example of someone who has made billions using strategies similar to this.

Tickle Me Elmo Was The Hottest Toy of 1996

Tickle Me Elmo Was The Hottest Toy of 1996

The Castle-in-the-air Theory was put forth by legendary economist John Maynard Keynes.  In layman’s terms, Keynes felt that investors were better off and would rather catch trends on the upswing, and then sell their stake in the trend at its peak.  For example, if you bought a crate of Tickle Me Elmo’s back in the summer of 96 for $30 a piece, you could have bought yourself a couple of cars if you sold your stock in early December of 96.  However, if you bought that same crate of Elmo’s in late December, and held onto them until January, you stood to lose a lot of money.  The Castle-in-the-air theory takes advantage of trends.  If you get in on a hot stock before anyone else, and exit just as it’s starting to plateau or fall, you have done well.  This theory focuses on consumer psychology more than on actual valuation of stocks.

There will be more to come from this book, but these were interesting enough theories to share.  If you have read the book, or if you have other investing books to recommend, please leave a comment below.

69 Responses to A Random Stroll Up to Wall Street
  1. Health and Fitness
    April 19, 2018 | 11:31 am

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  3. Health and Fitness
    April 19, 2018 | 6:38 pm

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    April 20, 2018 | 12:08 am

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    April 20, 2018 | 1:47 pm

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    April 20, 2018 | 5:51 pm

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  18. Health and Fitness
    April 20, 2018 | 8:40 pm

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    April 21, 2018 | 12:59 am

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Trackback URL http://mynextbuck.com/a-random-stroll-up-to-wall-street/trackback/

A Random Stroll Up to Wall Street

At the recommendation of my friend Bobby, I have started to read “A Random Walk Down Wall Street”.  This book is known as one of the premier investment books and a modern day classic.  I am slowly working my way through it, and I am sure you will hear me reference this book a lot as I read it.  However, today I wanted to share a simple tidbit from the first chapter.

The author, Burton Malkiel, references two different theories with regard to investing based on what the prospects of the future hold.  He calls these two theories, “The Firm Foundation Theory” and the “Castle-in-the-air Theory”.

The Firm Foundation Theory assumes that there is an intrinsic value for all stocks.  Something is either undervalued, overvalued, or at the right price.  Discovering what is undervalued or overvalued, and playing the market in the right direction until the stock reaches equilibrium is the way this theory works.  This also epitomizes the ‘buy and hold’ strategy of investing.  For example, lets assume Microsoft’s stock has been in the tank for some reason the past handful of months.  You know they will bounce back eventually; it’s only a matter of time.  So you buy the stock when it’s low, and hold onto it.  Eventually it will come back to its equilibrium value, and you made yourself a nice profit.  Warren Buffett is the perfect example of someone who has made billions using strategies similar to this.

Tickle Me Elmo Was The Hottest Toy of 1996

Tickle Me Elmo Was The Hottest Toy of 1996

The Castle-in-the-air Theory was put forth by legendary economist John Maynard Keynes.  In layman’s terms, Keynes felt that investors were better off and would rather catch trends on the upswing, and then sell their stake in the trend at its peak.  For example, if you bought a crate of Tickle Me Elmo’s back in the summer of 96 for $30 a piece, you could have bought yourself a couple of cars if you sold your stock in early December of 96.  However, if you bought that same crate of Elmo’s in late December, and held onto them until January, you stood to lose a lot of money.  The Castle-in-the-air theory takes advantage of trends.  If you get in on a hot stock before anyone else, and exit just as it’s starting to plateau or fall, you have done well.  This theory focuses on consumer psychology more than on actual valuation of stocks.

There will be more to come from this book, but these were interesting enough theories to share.  If you have read the book, or if you have other investing books to recommend, please leave a comment below.

69 Responses to A Random Stroll Up to Wall Street
  1. Health and Fitness
    April 19, 2018 | 11:31 am

    I really like your writing style, fantastic info , regards for putting up : D.

  2. Health and Fitness
    April 19, 2018 | 5:39 pm

    Great – I should certainly pronounce, impressed with your web site. I had no trouble navigating through all the tabs and related info ended up being truly simple to do to access. I recently found what I hoped for before you know it at all. Reasonably unusual. Is likely to appreciate it for those who add forums or anything, web site theme . a tones way for your customer to communicate. Excellent task.

  3. Health and Fitness
    April 19, 2018 | 6:38 pm

    You have brought up a very wonderful points , thanks for the post.

  4. Health and Fitness
    April 19, 2018 | 7:16 pm

    Good write-up, I’m regular visitor of one’s web site, maintain up the excellent operate, and It is going to be a regular visitor for a long time.

  5. Health and Fitness
    April 19, 2018 | 7:50 pm

    Attractive section of content. I just stumbled upon your weblog and in accession capital to assert that I get in fact enjoyed account your blog posts. Any way I’ll be subscribing to your feeds and even I achievement you access consistently fast.

  6. Home Design Ideas
    April 19, 2018 | 10:05 pm

    I have been reading out many of your stories and i can state clever stuff. I will make sure to bookmark your blog.

  7. Home Improvement Stores
    April 19, 2018 | 10:07 pm

    Hi, Neat post. There’s an issue together with your web site in internet explorer, would test this¡K IE nonetheless is the market leader and a big part of other folks will omit your excellent writing because of this problem.

  8. Online Affiliate Marketing
    April 19, 2018 | 10:09 pm

    Thanks for the sensible critique. Me & my neighbor were just preparing to do a little research about this. We got a grab a book from our local library but I think I learned more clear from this post. I am very glad to see such magnificent information being shared freely out there.

  9. Health and Fitness
    April 20, 2018 | 12:08 am

    Wow, amazing blog layout! How long have you been blogging for? you make blogging look easy. The overall look of your web site is magnificent, as well as the content!

  10. News
    April 20, 2018 | 1:36 am

    I really enjoy studying on this web site , it has superb posts . “Beauty in things exist in the mind which contemplates them.” by David Hume.

  11. Health and Fitness
    April 20, 2018 | 2:42 am

    I would like to convey my gratitude for your kind-heartedness supporting persons who have the need for assistance with this one idea. Your real commitment to passing the message all-around appears to be definitely important and have truly made women much like me to reach their ambitions. This warm and helpful key points denotes a great deal a person like me and substantially more to my mates. Best wishes; from each one of us.

  12. Health and Fitness
    April 20, 2018 | 5:06 am

    Heya i’m for the first time here. I found this board and I find It really useful & it helped me out a lot. I hope to give something back and aid others like you helped me.

  13. Health and Fitness
    April 20, 2018 | 11:54 am

    Appreciate it for helping out, wonderful info .

  14. Health and Fitness
    April 20, 2018 | 12:58 pm

    Howdy very cool website!! Guy .. Beautiful .. Amazing .. I will bookmark your website and take the feeds also¡KI’m satisfied to find numerous helpful info here in the post, we’d like work out extra strategies in this regard, thanks for sharing. . . . . .

  15. News
    April 20, 2018 | 1:47 pm

    Thanks for the sensible critique. Me & my neighbor were just preparing to do some research on this. We got a grab a book from our area library but I think I learned more from this post. I am very glad to see such magnificent information being shared freely out there.

  16. Health and Fitness
    April 20, 2018 | 3:46 pm

    Just wanna input on few general things, The website style and design is perfect, the content is rattling good : D.

  17. Health and Fitness
    April 20, 2018 | 5:51 pm

    Utterly composed subject material, Really enjoyed reading through.

  18. Health and Fitness
    April 20, 2018 | 8:40 pm

    I enjoy the efforts you have put in this, thanks for all the great posts.

  19. News
    April 21, 2018 | 12:59 am

    I like what you guys are up too. Such clever work and reporting! Keep up the excellent works guys I’ve incorporated you guys to my blogroll. I think it will improve the value of my website :).

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